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  • FIRST POST
    • bail-in
    • By bail-in 8th Jun 17, 3:08 PM
    • 11Posts
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    bail-in
    BRRB rules and Banking Act 2016 BofE resolution and bail-in
    • #1
    • 8th Jun 17, 3:08 PM
    BRRB rules and Banking Act 2016 BofE resolution and bail-in 8th Jun 17 at 3:08 PM
    BRRD, BofE, bank failure resolution, bail-in rule, FSCS, and bank savings deposits.

    I am new to moneysavingexpert.com forums. Is there a forum here on banking law? Posting here in the Savings and Investments forum is the nearest I could find appropiate for this post. Well here goes... opening a can of worms! Oh, and just to let you grammarians out there know, I am not fond of paragraphs, nor short sentences!

    How do the EU's Bank Resolution and Recovery Directive (BRRD) bank regulations and the implementing Banking Act 2016 legally affect UK bank savings deposits in practise in applying the new bail-in rule by the resolution authority, the Bank of England, PRA, in the event of a failing FCA regulated major UK bank or financial institution?

    The rules state that bail-in replaces, or at least has priority to, government bank bail-out in the UK. The BRRD rules stemming from the 2007-8 financial crisis, became law in the UK on 1st January 2016 under the 2016 Banking Act. The BRRD is law in most EU and the Anglosphere countries, U.S.A., Canada, etc.

    It is practically impossible for bank depositors to interface with the administration, legal etc. departments of the bank head office to get legal advice on how this implementation affects them and their deposit acounts. Account holders can only contact the consumer bank account interfaces, but operators cannot give legal advice and cannot pass the consumer request on to the registered bank admin head office to address. So to save you and their time in my opinion based on experience don't bother phoning or emailing or visiting your bank to ask about bail-ins in relationship to the risk to your bank acount savings and current account deposits. They are not legally trained and many have not even heard of the word bail-in. The actual registered admin. head office appears to be out of bounds by telephone and email to the public. All major banks have adopted this separatist structure between consumer retail banking interface and head office bank administration.

    In my experience, so I am saving you the trouble, the head bank account administration consumer offices of all the banks suggest the same thing, and that is to contact FSCS and FCA. However, the bail-in rules do not appear to be within their remit. The Bank of England (BofE) and its regulatory arm the Prudential Regulatory Authority (PRA) you would think the best bet as they were involved in the drawing up of the BRRD rules and the BofE and PRA applies and overseee the application of the BRRD rescue toolkit to the failing bank. Think again. Very difficult to speak to departments at the Bank of England on this subject by phone, especially if you are not a company. Not received a reply by email yet to my enquiry,

    The BofE refers bail-in enquiries to a pdf file bail-in, an introduction. This is an economics science paper and not a financial document in my opinion, so it is not so clear in the financial explanations and consequences for consumers in relation to my writing. So......, having an advantage of having professional qualifications and experience in law, but not banking law, I have had to check out the legal effects on my dosh in the banks myself. So far I am deeply concerned.

    The bail-in rule allows the resolution authority, BofE and PRA, to change all deposits, over the FSCS limit on protected accounts, into shares in the bank to recapitalise the bank and pay off the liabilities of the failing bank. (Large banks, building societies, financial institutions have been given until 2022 to recapitalise at 6.95% level, smaller institutions at their existing level.)

    Losing all your money above the FSCS protected amount is bad but the problem for the depositor, an unsecured creditor, is, I may be wrong here, that there is a backdoor in the legislation that states the resolution authority can bail-in all of the funds in the deposit accounts ie. convert them into unprotected shares in the bank to recapitalise the bank. In my dictionary all means all. Legal legislation is full of backdoors where one thing is said and somewhere else the opposite is said, giving the best of both worlds. They are termed: exceptons to the rule. In my opinion, they can be used as a way of getting round obstructions to what you want to do or accomplish.

    Remember the aim of the BRRD rules is to not bail-out banks using taxpayer monies, but to make the depositors and shareholders pay. So they are going to apply those rules in a way to achieve that goal. Shareholders, fair enough, but savings depositors? Why should we, the depositors, with a paltry level of interest, and a contractually agreed level of deposit risk, lose all our deposits to recapitalise a reckless banking industry which is still now years after the 2007-8 financial crisis having subprime investments and trillions in highly risky derivatives which Warren Buffet, arguably the greatest investor in the world, called weapons of financial mass destruction.

    The effect of this uncertainty relating to the application of the BRRD regulations can be catastrophic on a saver. Correct me if I am wrong, in the application of the bail-in rule by the Bank of England, the FSCS protection may no longer apply to funds below let alone above the limit in the case of the next UK failing bank, and the Icelandic Bank Iceserve failure case concluded that FSCS does not apply to systemic banking failure anyway. All of a depositors savings could be affected.

    Most savers are not wealthy. They often need immediate access to their deposits which the bank has contractually agreed to do. Surely the bank also has a contractual liability, a legal responsibility to inform customers of new info which could impact their risk level. (See Principles in FCA Handbook on FCA website.) Yet UK banks were given the year before 1st January 2016 to implement the rules. Have they told us about this and how it could change our risk free accounts into highly risky accounts? Most wealth is not kept in banks. In this bail-in situation the wealthy will benefit at the expense of savers who rely on instant access to the interest and capital for daily living. Why do you think there is this mad rush by banks to get you into fixed term savings. How will u get your money out then even if you know your bank is about to become insolvent?

    Come to think about it, from another perspective, the BRRD regulations are brilliant. The governments are trying to create a state free, taxpayer free, or partially taxpayer free, solution to prevent financial institution insolvency in which case the unsecured creditors would lose any unprotected savings anyway. Although, looking from the consumer point of view, the taxpayer is also the deposit account holder. So it is a double whammy! There are always winners and losers. Be thankful you don't live in Albania or Bulgaria where your chance of recovering money in a failed bank is zero for account holders, unless your "in the know!"

    Personally, I think banks should be public not private. Public banks in the past have generally worked very well for consumers. There is greater responsibility, disclosure, accountability, transparency, honesty and less risk, recklessness, greed, and herd mentality.

    Well this here be my opinion and request for further light and clarification on the issues considered. I may be wrong....
    Last edited by bail-in; Yesterday at 11:06 AM. Reason: update
Page 1
    • eskbanker
    • By eskbanker 8th Jun 17, 3:25 PM
    • 4,770 Posts
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    eskbanker
    • #2
    • 8th Jun 17, 3:25 PM
    • #2
    • 8th Jun 17, 3:25 PM
    just to let you grammarians out there know, I am not fond of paragraphs, nor short sentences!
    <snip>
    having an advantage of having professional qualifications and experience in law
    Originally posted by bail-in
    Who'd have imagined it, a lawyer with not the slightest interest in making their text legible or understandable?!

    It might be in there somewhere but can you identify any valid scenario where you don't believe FSCS would adequately protect depositors (up to its published limit)?
    • ColdIron
    • By ColdIron 8th Jun 17, 4:00 PM
    • 3,157 Posts
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    ColdIron
    • #3
    • 8th Jun 17, 4:00 PM
    • #3
    • 8th Jun 17, 4:00 PM
    My advice? Learn to love paragraphs, they're for our benefit not yours
    • Eco Miser
    • By Eco Miser 8th Jun 17, 4:09 PM
    • 2,838 Posts
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    Eco Miser
    • #4
    • 8th Jun 17, 4:09 PM
    • #4
    • 8th Jun 17, 4:09 PM
    If you can't be bothered to hit the return key occasionally, why should we be bothered to plough through a massive wall of text?
    Eco Miser
    Saving money for well over half a century
    • Gambler101
    • By Gambler101 8th Jun 17, 5:14 PM
    • 366 Posts
    • 905 Thanks
    Gambler101
    • #5
    • 8th Jun 17, 5:14 PM
    • #5
    • 8th Jun 17, 5:14 PM
    Impossible to read that lol
    The instructions on the box said 'Requires Windows 7 or better'. So I installed LINUX
    • Reaper
    • By Reaper 8th Jun 17, 5:46 PM
    • 6,058 Posts
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    Reaper
    • #6
    • 8th Jun 17, 5:46 PM
    • #6
    • 8th Jun 17, 5:46 PM
    I made a brave attempt to read it, and got about a third of the way through, and will attempt to answer you based on that...

    No there is no decided forum on banking law. This is a consumer forum, I suggest sites dedicated to lawyers if such exist, I assume you will be better aware of them than me.

    For those that don't know a bail-in is where those who have money in the company have to suffer a loss to keep it afloat rather than an external agency donating/loaning money.

    As far as I know it is irrelevant to savers who are protected by the FSCS up to their limits. There is no guarantee above that level.

    As far as legislation is concerned I refer you to this consultation:
    https://www.gov.uk/government/consultations/bail-in-powers-implementation-including-draft-secondary-legislation/bail-in-powers-implementation
    In particular:
    Bail-in involves shareholders of a failing institution being divested of their shares, and creditors of the institution having their claims cancelled or reduced to the extent necessary to restore the institution to financial viability.
    You will notice savers are not being targeted. The aim is to make sure those who have accepted risk (shareholders, creditors) shoulder the burden rather than those who have not (savers, taxpayers).

    Does that answer your question?
    • Reaper
    • By Reaper 8th Jun 17, 6:03 PM
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    Reaper
    • #7
    • 8th Jun 17, 6:03 PM
    • #7
    • 8th Jun 17, 6:03 PM
    After a coffee I gamely struggled on and see you have a specific concern - the legislation allows savers money to be converted into shares which can then be cancelled. I can't comment on whether your interpretation of the law is correct or not but I don't think that is anything to worry about because:

    1) That would still be a loss of savers money and my understanding is the FSCS would still compensate savers
    2) It is politically impossible. During the first crisis savers were protected beyond the legal minimums because they did not understand their savings were at risk, and as I said previously savers do not accept risk. Now people are more aware so in future I imagine they will be protected up to the more generous limits only. However once again if a loophole in theory allowed ALL of savers money to be lost the government would protect savers again. Both because savers had lost money through no fault of their own, and because no government who wanted to stay in power could possibly annoy every saver in the land!
    • EachPenny
    • By EachPenny 8th Jun 17, 6:40 PM
    • 1,120 Posts
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    EachPenny
    • #8
    • 8th Jun 17, 6:40 PM
    • #8
    • 8th Jun 17, 6:40 PM
    ...and because no government who wanted to stay in power could possibly annoy every saver in the land!
    Originally posted by Reaper
    Really?

    Maybe the Investment Guaranteed Growth Bonds will have done the trick... I guess we'll find out in the early hours of the morning
    "In the future, everyone will be rich for 15 minutes"
    • bail-in
    • By bail-in 8th Jun 17, 7:16 PM
    • 11 Posts
    • 3 Thanks
    bail-in
    • #9
    • 8th Jun 17, 7:16 PM
    Scenarios where FSCS compensation may not apply
    • #9
    • 8th Jun 17, 7:16 PM
    Thanks for making me chuckle. Better to ask them, but the FSCS phone desk people may have to put you through to a more senior level of help but in my experience you have to ask for that. Off the top of my head, foreign financial institutions where deposits are protected by that foreign country''s own deposit protection scheme. A situation of systemic banking collapse where the financial service is impacted as a whole causing multiple insolvencies as the FSCS was designed to deal with individual financial industry failures not systemic. Where the government decides they should not; in practice the FSCS requires permission from the government before it can issue compensation. Where the Bank of England instructs so, maybe. Maybe if all the corporate financial donors to the FSCS kitty decide they have had enough of financial greed destroying the industry, however very unlikely that one as you do not pee in your own garden, or some such saying. And my pet, in financial institution failing, the Bank of England application of the BRRD resolution toolkit specifically the bail-in tool where circumstances are such that all monies belonging to all depositors creditors, not just monies above the FSCS threshold, are transformed into shares within the bank in order to recapitalise the bank or whatever and reduce liabilities thereof. However, my opinion. I may be wrong.... A few more commas this time, but I just can't get to grips with paragraphs. There is always time and hope.
    • bail-in
    • By bail-in 8th Jun 17, 7:53 PM
    • 11 Posts
    • 3 Thanks
    bail-in
    Thank you for that thoughtful post. I will follow up the link you gave. Just one comment on your "savers are not creditors." I understand bank savers to be unsecured creditors, the bank owes them their deposts and interest with a promise of return and access to the monies either immediately or after a fixed term, and being way down in priority list saving depositors will be well at the front of the firing line in a bail-in. The bail-in rules are designed to catch saving depositors, as well as shareholders of course.
    • bail-in
    • By bail-in 8th Jun 17, 8:02 PM
    • 11 Posts
    • 3 Thanks
    bail-in
    Sorry, added Reaper to spam by mistake, whatever that does. How do I cancel that option? How do I reply inside the text of a post like you guys do. I cant copy and paste text from the posts and do it that way. When I post I select the option underneath to reply to that particlar post but my posts end up out of context at the end of the thread. Help, anyone? Just added myself to spam now! No not purposely, just select it by mistake when sliding my finger up the page.
    Last edited by bail-in; 08-06-2017 at 8:22 PM. Reason: Mistake repeated
    • ColdIron
    • By ColdIron 8th Jun 17, 8:08 PM
    • 3,157 Posts
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    ColdIron
    Sorry, added Reaper to spam by mistake, whatever that does.
    Originally posted by bail-in
    Simply press the spam button again

    I hope you have not been reporting other people who have responded to this thread not 'by mistake'?
    • badger09
    • By badger09 9th Jun 17, 9:47 AM
    • 4,975 Posts
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    badger09
    Press the Quote button underneath the post to which you want to reply, then type your reply in the blank space below.

    Re paragraphs - just pressing the 'return' key on your keyboard would at least give potential readers the chance to draw breath
    • Reaper
    • By Reaper 9th Jun 17, 10:00 AM
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    Reaper
    I understand bank savers to be unsecured creditors
    Originally posted by bail-in
    That's a good point. I believe they are thinking of bond holders, PIBS, suppliers etc as creditors rather than savers but you are technically correct.

    By the way in my list of reasons why savers would not be targeted I missed off another important point - savers have to have faith that their money is safe. As you probably know banks operate using the "fraction reserves banking" system. If you deposit £1 the bank will lend out many times that amount. When you ask for your £1 back they have to recover it from their limited liquid reserves. If everybody asks for their money back at the same time the bank goes bankrupt. At the time of the last crash banks were holding just 1% of their assets in cash.

    The government realised the panic queues outside Northern Rock could easily have become an all out run on the banks.

    They didn't just raise the compensation limits and refund savers 100% of lost savings to keep people happy, they did it to maintain faith in the banking system without which the whole economy would collapse.

    If it ever happens again they couldn't afford to let savers lose money they thought was safe for the same reason. So even if pinching savers money is possible in theory it cannot be allowed to happen in practice.
    • Malthusian
    • By Malthusian 9th Jun 17, 10:14 AM
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    Malthusian
    As you probably know banks operate using the "fraction reserves banking" system. If you deposit £1 the bank will lend out many times that amount.
    Originally posted by Reaper
    No, that's not correct, stop reading positivemoney.org. When you deposit £1 the bank lends out a fraction of that amount, hence "fractional reserve banking". Because they don't have all of your £1 any more, if you ask for the whole £1 back they have to find it somewhere else. So the rest of your post is correct.

    Lending out more than you actually own is gearing, not fractional reserve banking.
    • Uxb
    • By Uxb 9th Jun 17, 10:26 AM
    • 875 Posts
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    Uxb
    I also concur with @Reaper that in 2008 such was the febrile atmostphere in rhe UK it was essential to silently guaranteed 100% of deposits.
    Hence N.Rock was nationalized.
    B&B was split up with the savings arm being given to Santander
    Kauphing Edge was forcibly closed by the Government and the savings arm given to ING.

    The other thing most people fail to appreciate is that the retail deposits in a bank are small fry compared to the corporate deposits which are simply vast.
    So companies like Shell, Virgin, the supermarkets, the Credit card companies, BT etc would in effect go bankrupt overnight if their large deposits were bailed in and their banks accounts frozen. The UK would revert back to barter in a matter of days.
    So as @Reaper say - it cannot be allowed to happen short of course of full government/state failure


    I believe in Euro land there has been more of a tradition in selling true bonds and pibs to retail savers rather than our so called bond account which are simply fixed rate savings accounts. So in Euro land retail "depositor" who are actually in reality often bond rather than depositors may be more at risk.

    Anyway, I suggest the OP goes and asks Spain?
    Why?
    Two days ago the unfortunately named Banco Popular closed its doors and was compulsorily taken over by Santander for a nominal Euro 1.
    You will gather from this that it was not popular and has suffered a liquidity crisis recently - that's a bank run in eurospeak.
    It lost £3.6bn of deposit withdrawals in two days.
    So Spain is having a real example of a bail in conducted at this very moment. I have no idea of the details of how it is being done and who is going to be loosing - apart from bondholders and shareholders who get nowt.
    • Reaper
    • By Reaper 9th Jun 17, 10:32 AM
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    Reaper
    When you deposit £1 the bank lends out a fraction of that amount, hence "fractional reserve banking".
    Originally posted by Malthusian
    That's not my understanding. According to Investopedia and Wikipedia
    Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal.
    However I accept "geared" would be a better term for what I was describing.
    • Malthusian
    • By Malthusian 9th Jun 17, 12:02 PM
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    Malthusian
    Yes, that's what I said. If a bank takes £1 from you, and then lends 80p to a mortgage borrower, only a fraction of the bank deposits (£1) are backed by actual cash on hand (20p).

    You said that banks lend many times the deposit (i.e. that banks take £1 from you and then lend out £2 or £5 to a mortgage borrower) which is not correct.
    • Reaper
    • By Reaper 9th Jun 17, 12:38 PM
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    Reaper
    I see your point. However the money that the bank lends out comes back to them (eg they lend it to a house builder who buys bricks and the brick company put the money in their bank account). The bank lends that out again and so on, multiplying the effect.
    • Malthusian
    • By Malthusian 9th Jun 17, 2:34 PM
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    Malthusian
    I see your point. However the money that the bank lends out comes back to them (eg they lend it to a house builder who buys bricks and the brick company put the money in their bank account). The bank lends that out again and so on, multiplying the effect.
    Originally posted by Reaper
    It's still the same £1. If the brick company wants its deposit back the bank will have to call in the new loan (or borrow against it or raise liquidity some other way). The £1 thus passes back from the new debtor to the bank and back to the brick company.

    Meanwhile the £1 worth of bricks will be made into £1 worth of house, the housebuilder turns the £1 worth of house into £1 worth of money (by selling it), and the original £1 flows from the housebuilder to the bank (loan repayment) and from there back to the original depositor (withdrawal of deposit).

    Ignoring interest and the value added by the housebuilder's and the brick company's labour, nothing is being multiplied here, only moved. There is £1 worth of money and £1 worth of bricks in this system and all they do is flow from one place to another.

    The Positivemoney.org fallacy is to assert that if I loan £10 to Joe, Joe has £10 in his pocket and I have an asset worth £10 (Joe's debt) so my mysterious Shylockian wizardry has multiplied £10 into £20. This is, of course, balls. In this closed system, I cannot spend my £10 unless I call in my loan to Joe, so the £10 passes from Joe back to me and thence whatever I want to spend it on. There is £10 in cash, an asset worth £10 and a liability worth minus £10 so it's the same £10.
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